SCAG a ‘High-Risk’ Funds Recipient, Auditors Report

The Southern California Assn. of Governments, the regional planning agency for a vast, six-county area with 17 million residents, has been designated a “high-risk” recipient of state and federal funds after government auditors found a history of financial and other internal problems.

Documents obtained under the California Public Records Act show Caltrans officials assigned the high-risk rating in December and reaffirmed it in February after a team of auditors examined the association’s use of state and federal grants during the years 1998 to 2000.

The audit, finished in June of last year, found “material weaknesses” in the association’s accounting system, purchasing processes and internal controls.

Auditors also suggested that the agency may have used state and federal grants for purposes other than those for which they were intended.

Members of the association are scheduled to receive an update today on the audit and the agency’s financial condition.

The findings are potentially significant for the planning agency, which helps set regional priorities and can steer grant money to projects it deems worthy.

In recent months, the association has been faced with rising legal costs, interest payments and expenses related to a failed business venture.

As a result, SCAG has been slow to pay some bills, and the effect of that is subtly rippling through the region’s governments and the projects they are trying to build.

For instance, the construction authority building a light rail line from Los Angeles to Pasadena has been forced to tap its own reserves because SCAG has not paid for a study on extending the line to Claremont.

Moreover, the problems could grow worse if officials are not convinced that the association is improving. Two-thirds of the association’s $35-million budget comes from Washington and Sacramento.

SCAG officials insist that progress has been made to correct the problems and new systems are in place to closely monitor contracts and spending, but the agency’s cash flow problems have continued.

Bert Becker, the association’s chief financial officer, is expected to report at the organization’s annual meeting today that the agency owes $2.2 million to consultants, contractors and groups of local governments.

“The amount of past due obligations to consultants is substantial,” Becker said in a memo to the 188 cities and six counties that are members of the regional agency.

The association develops transportation, air quality, aviation, housing and other plans to guide future growth in a sprawling region that includes Ventura, Los Angeles, Orange, Riverside, San Bernardino and Imperial counties.

The agency, which has 175 employees, depends on state and federal funds and membership dues to operate.

The association does not have the power to determine land uses or decide the fate of development projects.

But the little-known agency does wield significant influence over highway and transportation projects, which must be included in its regional transportation plan to receive state and federal funding.

In recent years, the association has been at the center of Southern California’s airport debate.

The agency assigned Orange County a major share of the region’s future air travel demand by backing an airport at the former El Toro Marine Corps Air Station, only to have voters reject the idea.

Bounced Checks Lead to Caltrans Audit

Caltrans initiated the audit of the agency after chronic cash-flow problems led to two bounced checks in 1999 and forced an agonizing self-examination of internal weaknesses at the nation’s largest metropolitan planning organization.

Sandra Balmir, a planner with the Federal Highway Administration in Los Angeles, told the association’s Regional Council in February that the state audit found major problems.

Balmir said SCAG has a history of unsatisfactory performance, is not financially stable, has a management system that does not meet standards, has not conformed to the terms and conditions of previous grants and otherwise is “not responsible.”

Brian J. Smith, Caltrans deputy director of planning, wrote in December that “the audit found sufficient cause to categorize the agency as a ‘high risk’ recipient” of state and federal funds.

The designation marks the first time that Caltrans has applied the high-risk rating to a council of governments in California.

Smith noted in a letter that the regional agency “has significant cash-flow problems” and has not complied with the terms and conditions of its agreements with state and federal agencies.

Caltrans put SCAG officials on notice that the agency must prepare a detailed financial and business plan to resolve each of the issues raised in the audit or risk losing vital assistance from Sacramento and Washington.

In response to the critical report, association officials led by longtime Executive Director Mark Pisano have mounted an aggressive appeal of the audit’s findings.

“SCAG believes there is no basis for Caltrans to claim there is a ‘history’ of unsatisfactory performance based on one audit over an 18-month period that occurred after 33 years of successful operations,” Pisano wrote in a protest letter.

The agency does not dispute the finding that it was financially unstable at the time of the audit. Nor did it contest the conclusion that its management systems during the period were substandard.

But Pisano said in an interview there was no misuse of state or federal funds by his agency.

He insisted that the problems identified in the audit have been corrected.

“We’ve made progress,” Pisano said. “We’re confident what we have done resolves the issues in the audit.”

Pisano said he expects the regional agency will get “a clean bill of health” when state auditors review what has been accomplished since their last report.

Neither Caltrans nor the FHA would comment while specific issues in the audit are being appealed. But Caltrans spokesman Dennis Trujillo said state transportation officials will be meeting with agency representatives “to understand their concerns.”

In a letter to Pisano, Caltrans’ Smith did acknowledge that “SCAG has made progress since the audit with their accounting and administrative processes.”

At the time of the audit, SCAG did not require contract managers to perform proper contract administration.

Financial monitoring was a low priority, the audit concluded.

“Some contract managers reviewed invoices and kept track of expenditures and others did not,” the auditors said. “If expenditures are not monitored, the contract manager cannot maintain control of contract costs. A lack of control may result in cost overruns, untimely detection of problems, and/or payments in excess of contractual agreements.”

The auditors concluded that “weak controls in SCAG’s procurement procedures place federal and state funds at risk.”

To gain better control over contracts, the agency has installed new computer and software systems, placed its legal counsel in charge of contracts and employee relations, and brought in staff experienced in finance and internal controls.

In an effort to ease the agency’s cash crunch, Becker said the association has significantly raised membership dues. To provide working capital, the agency obtained a $3.5-million bank line of credit, which was raised recently to $5 million.

External Forces Affect Agency’s Finances

Interest payments have risen accordingly, as have concerns about the agency’s ability to repay the borrowed funds. A number of other factors have aggravated the agency’s financial woes.

Legal expenses are consuming a large share of the agency’s budget. A series of lawsuits have been filed challenging the association’s projections of future population growth and its allocation of future air traffic in Southern California. The agency also paid $375,000 to settle a lawsuit filed by a former agency attorney who was terminated. An insurance company is expected to pay most of the settlement cost and the agency’s $1 million in legal fees in that hard-fought case.

The organization’s efforts to branch out have run into trouble as well. It lost an estimated $210,000 on a $2.1-million contract to provide New York state with computer software that prepares a personalized itinerary for residents or visitors wishing to use mass transit.

Auditors wrote that they found no evidence that the association’s participation in the New York project was approved by agency committees or the Regional Council, a 72-member body that sets policy. Agency officials say the New York project had all the necessary approvals.

Before undertaking such projects, the auditors said the agency must “ensure that it has sufficient funds to finance the work without worsening its already precarious cash-flow situation.”

The audit notes that in some instances the agency billed Caltrans for reimbursement of costs that had not been paid to the consultants or contractors who did the work.

Instead, it used the funds received to pay general business expenses other than what the agency claimed in its request for reimbursement.

The audit was particularly critical of a lack of control over purchase orders, which were used to buy supplies and hire consultants. In five cases, purchase orders were used to pay $100,000 or more.

“SCAG did not appear to perform any type of competitive selection process when procuring goods or services using [purchase orders],” the audit found. “Competition is important to ensure that the goods and services are received at the lowest price and that state and federal funds are used effectively and efficiently.”

Agency officials said they no longer use purchase orders to hire consultants without competitive bidding.